1) big sky mining company must install $1.5 million of new machinery

1) Big Sky Mining Company must install $1.5 million of new machinery in its Nevada mine. It can obtain a bank loan for 100% of the purchase price, or it can lease the machinery. Assume that the following facts apply:

1. The machinery falls into the MACRS 3-year class.

2. Under either the lease or the purchase, Big Sky must pay for insurance, property taxes, and maintenance.

3. The firm’s tax rate is 40%.

4. The loan would have an interest rate of 15%.

5. The lease terms call for $400,000 payments at the end of each of the next 4 years.

6. Big Sky Mining has no use for the machine beyond the expiration of the lease, and the machine has an estimated residual value of $250,000 at the end of the 4th year.

What is the NAL (Net Advantage of Leasing) of the lease?

You would have cash flows for owning and leasing in years 1-4. You should also have tax on residual value in year 4 in cost of owning.

NPV LEASE ANALYSIS

Year = 0 1 2 3 4

Cost of Owning

After-tax loan payments ($135,000)($135,000) ($135,000) ($1,635,000)

Maintenance Cost

Tax savings from main.

Tax savings from depr. $198,000 $270,000 $90,000 $42,000

Residual value $250,000

Tax on residual value

Net cash flow $0 $63,000 $135,000 ($45,000) ($1,443,000)

PV ownership cost @ 9% $ (885,580.87)

Cost of Leasing

Lease payment(AT) ($240,000) ($240,000) ($240,000) ($240,000)

Net cash flow $0 ($240,000) ($240,000) ($240,000) ($240,000)

PV of leasing @ 6.5% $ (777,532.77)

Cost Comparison

PV ownership cost @ 9% $ (885,580.87)

PV of leasing @9% $ (777,532.77)

Net Advantage to Leasing $ 108,048.10

2) Net advantage to leasing problem (NAL).

ABC Industries is negotiating a lease on a new piece of equipment which would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for three years and then sold, because ABC plans to move to a new facility at that time. It is estimated that the equipment could be sold for $30,000 after three years of use. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each of the three years of usage. Conversely, ABC could lease the equipment for three years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would also include maintenance. ABC is in the 20 percent tax bracket, and it could obtain a three-year simple interest loan to purchase the equipment at a before tax cost of 10 percent. Should ABC lease or buy?

NPV LEASE ANALYSIS

Year = 0 1 2 3

Cost of Owning

After-tax loan payments ($8,000) ($8,000) ($108,000)

Maintenance Cost (after tax) ($2,400) ($2,400) ($2,400) $0

Depreciation $33,000 $45,000 $15,000

Tax savings from depr. $6,600 $9,000 $3,000

Residual value $30,000

Tax on residual value ($4,600)

Net cash flow ($2,400) ($3,800) ($1,400) ($79,600)

PV ownership cost @ 8% $ (70,307.84)

Cost of Leasing

Lease payment $29,000 $29,000 $29,000 $0

Tax savings from leas($5,800) ($5,800) ($5,800) $0

Net cash flow $23,200 $23,200 $23,200 $0

PV of leasing @ 8% $ 64,571.74

Cost Comparison

PV ownership cost @ 8% $ (70,307.84)

PV of leasing @ 8% $ 64,571.74

Net Advantage to Leasing $ (5,736.10)

We offer the best custom writing services. We have done this question before; we can also do it for you…

Place your order
(550 words)

Approximate price: $22

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more